Australia's unregulated tech incubator scene could be doing more harm than good

Greg Twemlow

News about Aussie tech start-ups succeeding here and then overseas may suggest a thriving incubator scene. The reality for most of our the majority of Australian incubator participants is very different, argues Sydney start-up business consultant Greg Twemlow.

Australia has a seemingly vibrant tech incubator ecosystem where budding entrepreneurs can find basic funds, advice, like-minded co-located buddies and free rent from a number of initiatives.

But these unregulated schemes and their results vary and without major changes, Aussie incubators will struggle to deliver the successes enjoyed by Silicon Valley incubators.

My most recent trip in May to San Francisco has reinforced my views about the performance of Australia's tech incubator industry.

Unlike California, Singapore and the UK, Australia has allowed tech incubators to proliferate without any substantive level of control, co-ordination and guidance from our federal government and the venture capital community. As a result, a majority of start-ups camped in incubators could be wasting their time and facing a significant opportunity cost.

As a business consultant I frequently see that start-ups are putting too much faith in incubator programs when they should instead be entirely focused on building their product, relationships and market understanding.

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At the same time, Australia lacks some of the characteristics possessed by other economies – characteristics that are crucial for start-ups to thrive.

In Silicon Valley and now in other large US cities such as New York, Seattle, Austin and Miami, in Singapore and in the UK, the model is of the utmost simplicity: brains attracts risk capital and risk capital attracts brains.

While Australia does not lack brains, it does lack risk capital and start-up skills, and that’s a major impediment to making the Silicon Valley incubator model work here.

In splitting my time between Sydney and San Francisco, I've identified a lack of capital for mid and late-stage start-ups as a major hurdle for young Aussie companies that have managed to secure incubator or angel investment.

It’s no coincidence that fast-growing tech firms relocate to Silicon Valley and increasingly Singapore for a better start in life.

I liken the start-up funding situation in Australia to a drip-feed system that should run for a year but dries up after three months. There’s just nowhere to go after the early support stage.

By contrast in the US, pension funds are major investors in venture capital funds that seek out start-ups in America’s tech incubator hubs, meaning start-ups have ready access to the capital they need just as they begin to grow rapidly.

A 2013 PricewaterhouseCoopers report identified that Australia’s economic and social climate seems to show a much higher sensitivity to failure than business cultures in North America.

This combination of a higher fear of failure and higher consequences of failure are toxic to the start-up scene. It could also be the reason so many of our entrepreneurs are putting their faith in incubator programs rather than garnering the courage to tough it out by getting direct access to the skills and experiences most relevant to their ideas.

Other commentators have argued that the risk of failure is a bigger hurdle to overcome for Australian entrepreneurs than for those in competitor economies.

Without regulation of its incubator programs, Australia runs the risk of unethical exploitation. In the past few years we have seen slick operators making grand promises and giving what amounts to false hope.

Start-up CEOs should be especially wary of fee-based operators promoting fast-track processes. These incubator programs offer training and packages to supposedly enable start-ups to ''graduate'' their programs and embark on a journey to success – in return for fees and a sizeable chunk of equity.

The reality is regularly that of time and money down the drain. Budding entrepreneurs are best advised to maintain a healthy scepticism of incubator training schemes. Their programs have a great way of keeping participants busy without progressing with the real work of building their product and finding a market.

Despite their patchy track record, Australian business incubator programs are booming. Our federal, state and some local governments are running programs. Universities and large telcos have started incubators. Fortune 50 companies have launched incubators and venture funds. Successful entrepreneurs have opened programs of their own; high-net-worth families are scouting around to invest in tech; angel investors are active with modest investments and capital boards like the Australian Small Scale Offerings Board work hard to find funding for start-ups.

But only a handful of these programs is established enough to have valuable experience or be able to point to consistent past successes. Would-be participants in an incubator are strongly advised to speak to past ''graduates'' of the program. Make a point of asking what their experience was of the scheme and whether it had any positive impact.

Australia does have effective start-up incubators, such as the pioneering Australian Technology Park in Sydney, recently awarded a major gong by the international incubator industry.

Yet not all incubator experiences are as worthwhile when it comes to moving start-up founders closer to building a successful company. Many incubators are very good at renting out real estate and keeping people busy, while taking them away from the essential work of product development, market testing and securing foundation customers.

It’s certainly possible to make a successful start-up happen in Australia. The absolute cream of Aussie start-up ideas will probably manage to find support here or more likely offshore.

Budding entrepreneurs are advised to be wary of false prophets as they work to realise their dream. While start-ups are almost universally funds poor, an even more valuable commodity is time and unlike funding, wasted time is a resource that can rarely be recovered.